If yesterday the bombardment, no pun intended, of bad news from around the globe was too much even for Mahwah's vacuum tubes to spin as bullish - for stocks - news, then tonight's macro economic updates have so far been hardly as bombastic, with the only real news of the day has Germany's Ifo Business Climate reading, which dropped from 106.3 to 105.8, declining for the 5th month in a row, missing expectations, and printing at the lowest level of since April 2013! (More from Goldman below) Net result: Bunds yields were once again pushed in the sub-1% category, even if stocks today are higher because the European data is "so bad it means the ECB has no choice but to do (public instead of just private) QE" blah blah blah.

Goldman on the Ifo:

Bottom line: The Ifo index declined more than expected in September. The decline is in contrast to yesterday's marginal increase in the September German Composite PMI, pointing to some uncertainty about the underlying trend of the German economy.

The Ifo index declined to a level of 104.7.0 in September against expectations of a small easing to 105.8. The 'assessment of current conditions' edged lower to 110.5 after 111.1, while 'expectations' declined to 99.3 after 101.7. The decline in sentiment was broad-based, with all major sub-indices of the survey showing a lower reading in September.

Today's Ifo figure stands in contrast to the stabilization of the composite PMI, which on the flash reading printed at 54.0 in September after 53.7.

 

 

Expect USDJPY momentum ignition to go berserk any minute as the HFTs wake up and are ordered by central banks to send futures higher, and the USDJPY 109 tractor beam to support the broader "market", especially if today's new home sales is as bad as we (and Goldman's former head of housing research) think it may be: because the time to start pricing in the untaper has almost arrived.

Asian investors are more on the front foot overnight as key equity markets rebounded from their previous day’s losses. Chinese equities extended their run higher overnight with the HSCEI and Shanghai Composite up +1.0% and +0.8% following the slight beat in China’s flash PMI headline yesterday. Markets are also seemingly overlooking another corporate default story in China. Chinese steel transporter Anhui Wanjiang Logistics said RMB2bn of its loans were overdue and that its chairman had been detained by police. The company has about RMB16.7bn in debt and is said to have used up its credit quota leaving it with no working capital (Reuters). Staying on China, S&P has said overnight that widespread defaults by local government financing vehicles are unlikely in the next year or so as they have sufficient resources (ie to cut non-core spending, improve revenue collection or make asset sales) to absorb weaker property related revenue (which accounted for about 20% of local government revenues in 2013). Away from China we are seeing modest gains across Taiwan and Korea although Japan has reopened after hols with a softer tone. Australian equities are lagging the rest not helped by a rather bleak commodity price projection by the Bureau of Resources and Energy Economics with broadly flat Iron ore and lower thermal coal prices in 2015.

Asian stocks little changed with CSI 300 outperforming and the ASX 200 underperforming. MSCI Asia Pacific little changed to 143.2. Nikkei 225 down 0.2%, Hang Seng up 0.4%, Kospi up 0.3%, Shanghai Composite up 1.5%, ASX down 0.7%, Sensex down 0.1%. 6 out of 10 sectors rise with utilities, energy outperforming and telecom, information technology underperforming.

European equities languish around yesterday’s lows with initial commodity-inspired support faltering as markets head into the US session. Initial positive sentiment has eroded with European participants provided with a lack of further catalysts to the upside, with the mixed German IFO report (business climate 104.7 vs. Exp. 105.8) revealing a 5th monthly consecutive decline for the headline figure adding to the recent negativity. In terms of stock specific news Pfizer PFE is said to be undeterred by Treasury restriction inversions and are weighing options including AstraZeneca bid. Elsewhere, Dutch courier TNT (-11%) is the underperformer in Europe after issuing a profit warning amid a deterioration in European trading conditions. 7 out of 19 Stoxx 600 sectors rise; basic resources, telecom outperform while media, banks underperform. 26.2% of Stoxx 600 members gain, 69% decline. Eurostoxx 50 -0.1%, FTSE 100 -0.2%, CAC 40 little changed, DAX -0.2%, IBEX -0.9%, FTSEMIB -0.1%, SMI +0%

In summary, European equities mixed with media, financials underperforming and oil & gas, telcos outperforming. German business confidence fell to level below median forecasts. Shanghai market rises, Japanese, Indian shares decline. U.S. equity index futures rise. Commodities little changed with platinum, WTI crude rising while Brent falls, dollar little changed. Aug. new home sales among today’s U.S. economic data.

On the US docket today, we have new home sales data and a 5yr Treasury auction in the US on top of a few Fed speakers scheduled. Fed’s Mester will speak on monetary policy in Cleveland and Fed’s Evans will speak at a labour market conference in Washington. Germany’s IFO survey (which missed again and printed at the lowest since April 2013, falling for the 5th consecutive time) was the main release in Europe.

Market Wrap

• S&P 500 futures up 0.2% to 1975.3
• Stoxx 600 down 0.1% to 341.4
• US 10Yr yield up 1bps to 2.53%
• German 10Yr yield down 1bps to 1%
• MSCI Asia Pacific little changed at 143.2
• Gold spot little changed at $1221/oz

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade mixed/lower (Eurostoxx 50 +0.1%, DAX -0.1%) with European participants shrugging off the commodity-inspired gains seen overnight.
• Fixed income products trade in close proximity to yesterday’s highs alongside the softness in equities, while the German IFO survey painted a relatively mixed picture of the nation’s economy.
• Looking ahead, attention turns towards today’s US new home sales, any comments from Fed’s Mester, and the 5y note auction.
• Treasuries steady in overnight trading as week’s auctions continue with 2Y FRN and 5Y notes; yield 1.795% in WI trading, highest since May 2011.
• German business confidence fell more than forecast in September, with the Ifo institute’s index dropping to 104.7 from 106.3
• Weak Ifo is boosting the case for large-scale government bond purchases by the ECB, Commerzbank says
• More regional authorities in China are relaxing mortgage policies to boost demand after removals of home-purchase restrictions failed to stem a slide in the property market amid tight credit
• Indian Prime Minister Modi starts a five-day trip to the U.S. Sept. 26, the first since he was denied a U.S. visa over 2002 anti-Muslim riots in his state of Gujarat; his landslide election win in May sent the Obama administration scurrying to rebuild ties with the new leader of the world’s biggest democracy
• Strikes by the U.S. and its five Arab allies against Islamic State positions in Syria may benefit President al-Assad, whose removal is a declared goal the U.S./Arab coalition and expose regional powers to retaliatory attacks
• The U.S. dropped almost as many bombs and missiles on Islamic State positions in Syria in its first night of airstrikes there as it did in the first month of attacks on the group in Iraq
• Three men suspected of having fought for Islamic State in Syria and deported by Turkey weren’t arrested on their return to France after police waited for them at the wrong airport
• Pfizer Inc. has approached Actavis Plc to express its interest in an acquisition that could allow the U.S. drugmaker to move overseas and reduce taxes, in a sign the Obama administration’s efforts to curtail such deals could fall short
• Sovereign yields mostly lower. Nikkei declines, Shanghai Composite higher. European stocks mixed, U.S. equity-index futures gain. WTI crude, gold and copper little changed

US Event Calendar

• 7:00am: MBA Mortgage Applications, Sept. 19 (prior 7.9%)
• 10:00am: New Home Sales, Aug., est. 430k (prior 412k); New Home Sales m/m, Aug., est. 4.4% (prior -2.4%)
• 11:30am: U.S. to sell $13b 2Y FRN
• 1:00pm: U.S. to sell $35b 5Y notes

Central Banks

• 12:15pm: Fed’s Mester speaks in Cleveland
• 1:00pm: Fed’s Evans speaks in Washington
• 10:30pm: Reserve Bank of Australia’s Stevens speaks in Melbourne
• POMO 11:00am: Fed to purchase $950m-$1.15b notes in 2036-2044 sector

ASIA

The Nikkei 225 traded in negative territory (-0.24%) weighed on by weakness in global equities and JPY strength. JGBs were higher from the get-go following the gains in US Treasuries but traded in a relatively tight range amid a lack of major market-moving data and events. Chinese markets shrugged-off early declines to trade higher (Shanghai Comp +1.47%, Hang Seng +0.35%) with telecoms benefiting from comments by China’s regulator, who stated the iPhone 6 is in the final review stages and reports in Shanghai Daily that Shanghai banks are to ease lending for home buyers. Nonetheless, growth concerns linger after Goldman Sachs cut their Chinese 2015 GDP forecast to 7.1% from 7.6%.

FIXED INCOME

Bunds have been provided further support from the softness in equities although have currently failed to break back above yesterday’s highs, with the German 10yr yield remaining below 1.0%. The GR/GE spread continues to widen amid fears that Greece may require a third aid package. Elsewhere, the Netherlands books for its new 5yr offering remain open with books in excess of EUR 13.7bln and results due to be published before tomorrow’s open.

Pan Euro Agg month-end extensions +0.08yrs (Prev. +0.03yrs), 12-month average +0.07yrs (IFR)

RANsquawk sources report large Sterling month-end extensions, ranging between +0.28yrs to +0.31yrs – Unconfirmed*. Note, that this is much higher than the monthly average of +0.05yrs, but broadly in-fitting with this time last year at +0.33yrs.

EQUITIES

European equities languish around yesterday’s lows with initial commodity-inspired support faltering as markets head into the US session. Initial positive sentiment has eroded with European participants provided with a lack of further catalysts to the upside, with the mixed German IFO report (business climate 104.7 vs. Exp. 105.8) revealing a 5th monthly consecutive decline for the headline figure adding to the recent negativity. In terms of stock specific news Pfizer PFE is said to be undeterred by Treasury restriction inversions and are weighing options including AstraZeneca bid. Elsewhere, Dutch courier TNT (-11%) is the underperformer in Europe after issuing a profit warning amid a deterioration in European trading conditions.

FX

In FX markets, commodity currencies have trimmed their overnight gains with NZD failing to hold onto the upside stemming from NZ trade data showed a smaller deficit than expected as exports were higher than forecast. Elsewhere, AUD has come off its overnight highs after approaching a USD 130mln option expiry at 0.8900 which is due to roll off today. JPY has been seen stronger throughout the session after Japanese PM Abe said he wants to be careful about the impact on local economies from recent JPY weakness.

COMMODITIES

Overnight, copper was seen higher with increased interbank lending in China supporting Asian equities and in turn spurring copper demand. However, this positive sentiment has since eroded with European participants being provided with a lack of further catalysts to the upside. Brent and WTI crude futures have also pared overnight gains in the run up to today’s DoE inventories report with the headline figure expected to reveal a build of 750,000bbls, while spot gold has continued to move in line with the broad trend in commodities markets.

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DB's Jim Reid concludes the overnight recap

DM risky assets had another challenging session yesterday as we saw broad based equity market weakness on both sides of the Atlantic. Treasuries benefited from the broader flight to quality which also saw Gold and the US Dollar rally off their intraday lows. There was some renewed focus on geopolitics with the escalating military tension in Syria as we reported yesterday but in reality the round of global PMIs were just not that impressive (more below). With all that we saw the S&P 500, NASDAQ, DAX, CAC, and IBEX down -0.58%, -0.42%, -1.58%, -1.87% and -1.33%, respectively. Specifically for the S&P 500, yesterday marked the 3rd consecutive down day for the index. We’ve had 6th consecutive 3-day declines this year but never a fourth so another down day today would be a first for 2014.

Back to market drivers, new rules set by the US government to clamp down on tax inversion structures also added pressure on European health care stocks especially those companies that were previously priced in as takeover targets. The rule which took immediate effect and apply to all pending deals basically blocks US corporate from acquiring foreign firms just so that they can move their tax address overseas to avoid higher corporate tax rates back home. We are no legal experts but can’t help thinking that law firms will be at the benefiting end of the rule change. Shares in AstraZeneca (-3.6%), Shire (-2.5%) and Smith & Nephew (-2.8%) all suffered yesterday.

On the brighter side of things Asian investors are more on the front foot overnight as key equity markets rebounded from their previous day’s losses. Chinese equities extended their run higher overnight with the HSCEI and Shanghai Composite up +1.0% and +0.8% following the slight beat in China’s flash PMI headline yesterday. Markets are also seemingly overlooking another corporate default story in China. Chinese steel transporter Anhui Wanjiang Logistics said RMB2bn of its loans were overdue and that its chairman had been detained by police. The company has about RMB16.7bn in debt and is said to have used up its credit quota leaving it with no working capital (Reuters). Staying on China, S&P has said overnight that widespread defaults by local government financing vehicles are unlikely in the next year or so as they have sufficient resources (ie to cut non-core spending, improve revenue collection or make asset sales) to absorb weaker property related revenue (which accounted for about 20% of local government revenues in 2013). Away from China we are seeing modest gains across Taiwan and Korea although Japan has reopened after hols with a softer tone. Australian equities are lagging the rest not helped by a rather bleak commodity price projection by the Bureau of Resources and Energy Economics with broadly flat Iron ore and lower thermal coal prices in 2015.

Staying on the EM theme, the Brazilian complex went through some consolidation yesterday following Monday’s sell-off. Brazil’s CDS spreads were 5bp tighter to 154bp whilst the local 10yr bond yield was little changed. The upcoming Presidential election next month will likely remain a key driver so upcoming polls will receive plenty of focus. Per the WSJ, the latest opinion poll shows a tightening in the race between President Dilma Rousseff and her main challenger, Marina Silva. Both candidates would get 41% of the vote in a head-to-head contest, according to the survey by the Ibope polling organization for the Globo television network and the Estado de S. Paulo news organization. Marina Silva’s lead has narrowed based on a previous poll released on the Sept 16 which showed a 3pt lead.

In other parts of EM, our strategists have covered their tactical underweight in Russia following recent signs of de-escalation in the Russia/Ukraine crisis. However over the longer term they continue to see reasons to be strategically underweight and recommend reducing on strength because they think the conflict will likely persist given the fundamental differences and the wide gap between the positions taken by different parties while economic conditions continue to deteriorate. More on geopolitics, the US and its Arab allies (Saudi Arabia, Qatar, Jordan, Bahrain and the United Arab Emirate) bombed militant groups in Syria for the first time yesterday, killing scores of Islamic State fighter. The attacks encountered no objection from President Bashar al-Assad's Syrian government NYT.

Back to the developed world and onto the European PMIs. We won’t spell out the actual details here but they were generally speaking soft across the board (especially in manufacturing). As our European economists noted these readings are consistent with a modest revival of the recovery after euro-area GDP stalled in Q2. However, the message is one of a slow, uneven and fragile recovery. The PMIs imply a +0.3% qoq pace of GDP growth in Q3 and marginally slower in Q4 if PMIs remain unchanged at September's level. This would be not fast enough to close the significant negative output gap. The ECB will likely have to be very aggressive to combat persistent downward pressure on inflation. On the other side of the pond the Markit US PMI reading was broadly as expected (57.9 b 58.0) whilst the Richmond Fed survey (14 v 10) came ahead. The FHFA house price index (+0.1% v +0.5%) rose less than expected in July though.

Before we wrap up, Fed officials are warning banks that rising levels of HY credit exposures on their balance sheet may trigger more capital requirements (Bloomberg). The article said that regulators are stepping up monitoring after the 2013 guidance issued by the Fed, the FDIC and the Office of the Comptroller of the Currency didn’t slow deal volume or the declining standards. We can’t help thinking that this will have some impact on dealers’ market making abilities with volatility implications for the asset class.

In terms of today, we have new home sales data and a 5yr Treasury auction in the US on top of a few Fed speakers scheduled. Fed’s Mester will speak on monetary policy in Cleveland and Fed’s Evans will speak at a labour market conference in Washington. Germany’s IFO survey will be the main release in Europe.